The state of the general economy – through VC eyes

I was asked this morning how the general economy is looking from my vantage point. It was a good question, because we venture capitalists get to see detailed information from many companies on a very regular basis. Because my fund invested in a company that sells primarily to the financial sector, I was able to see that the financial sector was in big trouble months before the news hit the general financial press. So, I spent some time thinking about what I have been seeing lately.

From what I see in our portfolio companies, the economy is looking good right now – everything except job growth. Keep in mind that there is still a lot of stimulus spending going on now, and still to come. That stimulus spending seems to be working as planned. What I don’t know is whether the economy will be strong enough on its own when the stimulus finally tails off in a year or two.

What I can give as a very solid data point is that the companies in my venture portfolio are all beating their revenue forecasts for this year. Those numbers are not gut feels or opinions. They are real customers parting with cash to buy products faster than had been expected. That is very good news for the recovery.

With respect to jobs: unemployment is a lagging indicator. Jobs are cut after downturns begin and jobs are added after upturns begin. The managers of companies are horrible at recognizing what is actually happening in the economy, and thus are almost always caught unawares when the general activity changes in either direction.

The managers in the companies in our portfolio are no different. They would much rather overwork their current employees for a while than risk hiring people that they have to be laid off again in a few months.

I’m confident job growth will come, but I’m not sure when. Watch the confidence surveys – they will tell you whether the hiring managers believe that growth is real, which will tell you when they will be cranking up hiring.

There is still plenty of structural weakness in the economy, so I don’t expect the upswing to be steady. I think we will see a “2 steps forward, 1 step back” kind of recovery over the next year or so.